The recent saga that unfolded at Infosys saw something which was unprecedented in Indian corporate history. A professional CEO, the first non –promoter CEO with an unblemished track history was forced to resign, not by the Board which reposed full faith in him, but due to pressure and attacks by a promoter who was not even on the board. The buck didn’t stop there!! Within a few days, the board consisting of some distinguished persons from the corporate world were forced out! In short external powerful forces overruled the board and the executive management.
Similarly, at Tatas a year back, the CEO, who was a family confidante with a great track record was booted out due to pressure again by the promoters. In this case, strangely, the board which took the decision to sack the CEO had never before raised any issues with the CEO before on his performance!
Hail “Active Promoter Management”!
The Indian corporate world is dotted with family owned firms which are growing globally and wants to professionalize its working. However despite the claims of the promoters, especially of listed firms of having a hands off approach, the truth is different. Promoters either through their proxies run the firms or exert influence through other means as seen in Infy. However, research shows that family driven firms globally generate more value on a long term basis as compared to many professionally run firms due to their commitment to the business. Hence on a positive note, it can be argued that the promoters’ involvement is beneficial to the firm to some extent. In many global firms like Ford, Walmart, etc. the promoter families have big stakes but the businesses are left to the professionals and the board. Thus, there is a thin line of difference between active interference and outside support.
In the case of Infy, the leading promoter, who chose the CEO and quit the board on the CEO`s arrival, attacked the board and CEO publicly. Similarly, in Tatas the promoter, started interfering with the CEO`s actions and questioning them. These activities go against the ethos of professional management and is probably due to the deep emotional attachment of the promoters to the firms. Indians are an emotional lot and just as there are deep family attachments to all actions, the emotional attachment of the promoters to the firms which they have built up is natural. In the famous case of Apple, Steve Jobs who started the company was sacked by the board when they found him interfering too much.
This leads to the question whether Indian corporate world will see a completely professional management in the days to come. If highly respected firms like Tatas and Infy cannot do it, who can? However, equity markets, especially global markets, demand good governance and professional management and hence Indian firms cannot walk away from this fact. Secondly, expanding business demands and an ever changing global business scenario needs different skill sets which can be brought in by good governance and by inducting professionals only.
Hence the incidents at Infy and Tatas have thrown some interesting conclusions. Firstly, corporate governance in Indian firms will be largely dictated by the promoters who hold significant stakes in the company. This might change with more global participation and diversification by Indian corporates.
Secondly, expat global professional CEO`s will be wary of working, on a long term, in Indian firms given the governance scenario. At Tatas, a decision on flat organizational structure taken by the expat CEO was overturned by the corporate management. Hence we can see a number of home grown CEO`s taking the mantle as well as open lots of avenues for global Indian professionals who have wide global exposure. These people will be best suited to handle to Indian business scenarios as well as the promoter expectations.
“Shareholder activism” which is very normal in western markets is still nascent in India. “Active promoter management” cannot be a full substitute to shareholder activism and probably not healthy for Indian businesses in the long run.
To conclude, global investors who are attracted to India due to its growth story will however have to factor in the effects of governance issues, both good and bad, due to “Active Promoter Management” in India.
